For Root Learning, 2008 was one of its best years on record. The Sylvania, Ohio-based company was able to pay off its debt and award debt-retirement bonuses to its approximately 100 employees. However, the celebration was short-lived.
With the downturn in the economy, sales dropped 30 percent during the first quarter of 2009, leaving company leaders with some tough decisions to make, according to Jim Haudan, CEO of Root Learning (www.rootlearning.com), an international management consultancy. “We were significantly in the hole—we’re talking six figures.”
To save money, the company cut back on travel and reduced discretionary expenses wherever possible. “We cut everything that wasn’t nailed down,” he says, but it still wasn’t enough.
Ongoing Dialog
Company leaders kept employees—called “Rootizens” at Root Learning—informed about the decline in business and how the company was responding to it, says Haudan. Leaders did so without “sugarcoating” the news and without “creating panic and anxiety.” For example, leaders would say, “We might be in the toughest economic environment any of us has ever seen and, together, we think we can make it through this,” he explains.
Leaders asked Rootizens for their own cost-cutting ideas and implemented several, including a suggestion to offer unpaid sabbaticals.
Soon it became clear that more drastic measures would be necessary. However, the company wanted to avoid layoffs—both out of concern for the welfare of its workforce and from a strategic standpoint. “We had one of our best years in 2008, and it was with all of the people in the room,” he says. Root Learning wanted to be positioned for growth when the economy turned around.
“We still drew some lines in the sand. We weren’t going to go into debt to retain people,” Haudan says. But the company modified its net income goals, basically reducing “all expectations of making a profit—to retain talent,” he says.
Root Learning set a goal of breaking even by mid-year and implemented an across-the-board salary cut in April 2009—15 percent for the top five leaders, 10 percent for the next 25 leaders, and 5 percent for the rest of the workforce.
Although Rootizens may not have been fully “prepared” for the news, they were aware that salary reductions were a possibility because leaders had broached the topic in previous discussions about the company’s financial situation.
Local businesses—and even some employees—questioned the company’s decision to reduce salaries and avoid layoffs. “Some folks here even said, ‘Why in the world are we doing that?’” Haudan recalls. But Root Learning was convinced that retaining talent was key to its success once business rebounded.
The company told employees upfront what metrics it would be measuring to determine whether their full salaries would be reinstated. “We talked about that almost from the beginning,” he says. “There was a true sense of ‘we were all in this together.’”
Root Learning’s strategy paid off. “We were able to break even by mid-year,” Haudan says. The fourth quarter of 2009 was its most successful quarter ever in terms of sales, and it finished the year down only 8 percent (gaining significant ground from the 30 percent drop experienced early in the year).
During the fourth quarter, the company reinstated salaries to their previous levels. And when it exceeded a new target for net income, the company awarded incentives in the same amount that Rootizens’ pay had been reduced, states Haudan. “They did not expect to be made whole for the year.”
The company’s approach helped boost productivity and loyalty and gave Rootizens a more in-depth understanding of the business, which will also help the company going forward, Haudan explains.
Tough Decisions
Employers contemplating salary reductions during tough economic times might want to consider the following advice:
Seek employee input. When looking for other ways to cut costs, ask employees for their ideas. “Don’t think for them. Ask them to think with you,” says Haudan.
Avoid surprises. When possible, give employees advance notice that salary reductions are a possibility.
Keep them informed. Although you don’t want to create panic, it is important to be open about the company’s financial situation. “The real danger is not giving people accurate information and not being open and honest with them,” he says, adding that he believes a leader’s job is to “define reality and create hope.”